Angela Merkel is preparing to negotiate a new coalition for her third term as
German Chancellor after falling agonisingly short of an overall majority in
the Bundestag.

Allies said the overall make-up of the new government should be clear relatively soon.

"I hope that we will be able to present a new government in the next week," said Peter Altmaier, an MP for Mrs Merkel's Christian Democratic Union.

Preliminary results put Mrs Merkel's bloc on 311 seats in a 630-seat chamber where three other parties are all on the Left. Robbed of her liberal allies by the electoral system that sets a five per cent bar on entry to parliament, Mrs Merkel is likely to be forced into a "grand coalition" with the next biggest party, the Social Democrats.

An alternative route, opened up by Mrs Merkel's post-Fukushima decision to abandon nuclear energy as a source of electricity, would be to seek an alliance with the Greens.

But the rise of a pro-tax cuts, eurosceptic party, Alternative for Germany (AfD), means Mrs Merkel could face resistance from within her own supporters to a tie-up with the Greens.

Leaders of the liberal Free Democrats warned the party would have to undergo a root and branch reform if it was to return to the top table of politics. It suffered a particularly humbling fall after achieving a record 15 per cent in the 2009. Philipp Roesler, the party's youthful leader, called the result its "saddest" hour.

Its vote collapsed to 4.7 per cent, less than a third of its pervious share, as the electorate punished the party's failure to squeeze tax cuts or business-friendly reforms out of Mrs Merkel and her fiscally-austere finance minister, Wolfgang Schäuble.

The upstart AfD also failed to squeeze into parliament with a 4.8 per cent tally. As it nonetheless sought to seize new ground on the Right, Mr Schäuble clashed with its main spokesman, Bend Lucke on Sunday night. He warned there would be no concessions to critics of his Euro-focused economic policies.

"We have a broad fundamental consensus regarding Europe policy," he said "We will continue to play our part as an anchor of stability in keeping Europe together."

Alexander Gauland, founding member of the AFD and the top candidate in Brandenburg, said that the party's strong economic message represented a challenge to the German consensus.

"If the FDP would have kept their promises of four years ago, it would not have given ground to us today," he said. "We are the heirs of the FDP."

German coalition negotiations tend to be painstaking affairs that can last months. The last grand coalition agreement in 2005 took 65 days to thrash out.

Peer Steinbruck, the Social Democrat Chancellor candidate, acknowledged Mrs Merkel had won a mandate to lead the next government but, in a demonstration of the potential difficulties ahead, signalled he would not be part of it. Mr Steinbruck was finance minister in the last grand coalition, a post that is seen as beyond the party's bargaining power this time round.

With the Left of the Social Democrats hankering for an alignment with the largely former Communist Die Linke, the remaining party in the Bundestag line-up, a coalition deal can be expected to face bitter divisions in he junior party.

The Social Democrats are likely to oppose any serious push to limit the powers ceded to Brussels, a factor that is likely to see Mrs Merkel's European policies orientate back closer to the French and away from the British.

President Francois Hollande was the first to call to congratulate Mrs Merkel on Sunday night, while David Cameron tweeted he looked forward to working with the woman set to surpass Margaret Thatcher's tenure at the head of government.